The big economic challenges facing Japan’s new government in 2013

Japan’s new prime minister, Shinzo Abe, is keen not to make the mistakes of his previous premiership when he lost the Upper House election and survived in the job for only one year after being elected in 2006. With Upper House elections coming up again in around six months, he plans to concentrate on the economy in the hope that his proposed measures will produce results by the time the electorate goes to the polls.

JAPAN’S political focal point of 2013 is the Upper House election which is expected to be held in July 2013. The new government of Prime Minister Shinzo Abe will do everything possible to ensure that the Liberal-Democratic Party (LDP) wins the election, with or without its coalition partner, the Buddhist party, New Komeito.

Mr Abe has learned from his political failures. During his first tenure as prime minister, from 2006 to 2007, he lost the Upper House election in the national Diet, Japan's parliament. It marked the beginning of the end of his short tenure and cast a shadow of public discontent over the LDP’s remaining two years in power.

He has admitted that his party’s victory in December 2012 was more of a defeat of the main opposition, the DPJ, than a win for his party

No party has a majority in the Upper House. The LDP and New Komeito have 102 out of a total of 242 seats; the Democratic Party of Japan (DPJ) has 88 seats. The remainder are distributed among other parties. Six are vacant.

Three challenges

Half the seats - 121 of the total - are to be contested in the summer. This provides the LDP with an opportunity to gain the majority in the Upper House and keep control over Japan until the end of 2016, when the terms of the lower house lawmakers will expire.

To win the election, the LDP has to deal with three challenges.

First, Mr Abe is not popular with the electorate. He has admitted that his party’s victory in December 2012 was more of a defeat of the main opposition, the DPJ, than a win for his party.

The LDP chose Mr Abe as its candidate because of his party connections and his ability to balance its various internal factions. He is not seen as an executor of change.

Second, surveys consistently show that the economy is what matters most to the electorate.

Mr Abe focussed on symbolic themes such as the creation of a ‘beautiful Japan’ or history school books in his first term as prime minister in 2006.

This did not go down well with the public and he suffered a rapid loss of support. He has learned from that experience.

Economic upswing

Mr Abe is now putting the economy at the top of his agenda, with a three-point strategy:

• Depreciation of the yen against the dollar, by talking the currency down. The yen fell from 83 to the dollar on December 15, 2012, the day before the election to 89 to the dollar on January 15, 2013, a decrease of seven per cent

• An inflation target of two per cent, achieved by flooding the economy with money printed by the Bank of Japan to end the deflationary environment which has suffocated consumer spending and corporate investments for two decades

• Growth by debt-fuelled government spending on infrastructure and defence with a massive stimulus budget for the current fiscal year, ending on March 31, already passed by the government

The hope is that these measures will produce a significant, measurable economic upswing in the short term until the Upper House election in the summer.

Increasing debt

Instead of returning to fiscal solidity, Japan is expected to further increase the debt level from 240, or even 250 per cent of GDP this year

The LDP will spend hundreds of billions of dollars to ‘kick start the economy’ in spite of the poor record of similar stimulus packages since the early 1990s.

They have created a debt pile in Japan which is by far the highest in the developed world, far higher than those of Greece or Spain in terms of gross domestic product (GDP) per capita.

Instead of returning to fiscal solidity, Japan is expected to further increase the debt level from 240 or even 250 per cent of GDP this year.

Voices in politics and the media calling for an end to further increases in debt receive little, if any, attention. In some cases, journalists appear to have given up on critical evaluation of the billions and trillions of yen involved.

Stimulus package

Some newspapers reported in mid-January 2013 that, as part of the stimulus package, a budget of around US$700 million (60 billion yen) – enough to buy two new Airbus 380 superjumbos – was earmarked for the upgrade of just two military helicopters.

Japanese households and companies are famous for their thriftiness. But the general reaction to the rise in debt seems to be one of denial.

One problem is that the large numbers, which are expressed in yen and so look around 100 times higher than the equivalent figures in dollars or euros, have become practically incomprehensible to the large majority.

LDP politicians and supportive economists frequently refer to the US$700 billion stimulus package of the US government in 2008-09 as a benchmark.

But the population of the United States is expected to grow from 320 million to more than 400 million by 2050. In contrast, Japan’s population is projected to shrink from 127 million to 90 million by 2050 and to 43 million by 2110.

Nuclear energy

The rapidly ageing and shrinking population will have to pay back a rapidly increasing mass of public debt.

The third challenge for the LDP stems from its reluctance to introduce any reform or change that might cost votes. This includes Japan’s participation in the Trans-Pacific Partnership (TPP) agreement.

The business lobby, which is largely in favour of free trade, is unlikely to overcome the massive resistance to participation in the TPP from the agricultural lobby and the healthcare sector, both traditionally strong supporters of the LDP.

The LDP has traditionally been in favour of nuclear energy, but it is avoiding any commitment in the field of energy policy.

The reactivation of nuclear reactors will be left to the new regulatory body, the Nuclear Regulation Authority (NRA), which mostly consists of pro-nuclear experts and bureaucrats.

The restart of another reactor before the forthcoming election is unlikely as Mr Abe wants to avoid a public backlash.

Unlikely support

Surveys indicate that energy policy has a medium priority for the electorate, and that the majority wants to abandon or reduce the usage of nuclear power.

Mr Abe has already postponed a fundamental decision on Japan’s energy strategy for 10 years, apparently speculating that the Fukushima nuclear disaster of 2011 will be forgotten over time.

The LDP has an unlikely supporter for its nuclear plans - its archrival, the DPJ, which has chosen Banri Kaieda, a former head of the Ministry of Economy, Trade and Industry (METI) and a strong supporter of nuclear energy, as its new party leader.

The third major political force, the Japan Restoration Party of the former Tokyo governor, Shintaro Ishihara, and Osaka mayor, Toru Hashimoto, has no clear position on the nuclear question. Mr Ishihara is a strict supporter of nuclear energy whereas Mr Hashimoto prefers a phase-out plan by the 2030s.

As a result, Japan’s energy policy will remain ambiguous for the years to come. No party will take the responsibility to make a clear-cut decision.

Exchange ratio

Domestic heavyweight players in the solar and wind energy business have begun to take advantage of the generous feed-in-tariffs, so these subsidies are likely to stay, providing huge profit opportunities for alternative energy producers.

The restart of another reactor before the upcoming election is unlikely as Mr Abe wants to avoid a public backlash

Japan will keep buying huge amounts of natural gas and oil on international markets to make up for the loss of nuclear capacity. In particular, it will try to buy shale gas from the US without signing a free-trade agreement such as the TPP.

Japan’s imports of natural gas and oil will keep the decline of the yen in check.

Most observers assume a yen-dollar exchange ratio of around 85-90 for 2013, a level that seems to be acceptable to Japanese importers and exporters as well as foreign players such as the United States and the European Union.

It also seems acceptable to Japan’s neighbour, South Korea, which the higher yen would hit directly.